Nippon India and Kotak PSU Bank ETFs have emerged as top performers among index ETFs, delivering 28% returns over the past year. This growth highlights the strong momentum in India's public sector banking space. Investors should look beyond short-term gains by analyzing long-term performance and the inherent risks of sector-concentrated funds before making decisions.
What Happened
Public sector banking ETFs have delivered strong returns, with Nippon India ETF Nifty PSU Bank BeES and Kotak Nifty PSU Bank ETF both recording a 28.0% return over the past year. This performance has placed them at the forefront of the index ETF category, based on funds with at least Rs 1,500 crore in assets under management (AUM). While short-term trends have been favorable, these funds show varying performance across different timelines, emphasizing the importance of looking at both long-term and short-term data.
The Performance Picture
The 28% one-year return for both Nippon India and Kotak PSU Bank ETFs signals a robust period for the sector. For context, other sectoral funds have also seen activity, with the Nippon India Nifty Pharma ETF posting a 15.2% gain, and the Bharat 22 ETF, which holds a significantly larger corpus of over Rs 10,486 crore, recording a 10.6% return over the same period. While Nippon India’s PSU Bank ETF led in one-month returns at 9.4%, the Kotak Nifty PSU Bank ETF showed stronger consistency over a three-year horizon, with a 29.7% CAGR return. This divergence highlights that top performance over one year does not always guarantee leadership over longer cycles.
Why Sector-Specific ETFs Behave Differently
Investing in a PSU Bank ETF is different from buying a broad-market index fund like a Nifty 50 ETF. These ETFs offer concentrated exposure to government-owned banks. Because these funds hold 100% of their assets in a single sector, their returns are highly dependent on the performance of that specific industry. When the public banking sector sees growth—often driven by factors like improved asset quality, government policies, or credit expansion—these ETFs tend to outperform the broader market. However, this same concentration means that any regulatory change, policy shift, or economic downturn affecting state-owned banks can lead to sharper declines compared to diversified funds.
Risks to Consider
While the current momentum in PSU bank stocks is notable, investors should be aware of the inherent risks in sector-focused passive funds:
- Concentration Risk: Because the portfolio is limited to one sector, there is no diversification across industries like IT, FMCG, or Energy. A downturn in the banking sector directly impacts the entire fund.
- Cyclical Nature: Public sector banks are sensitive to economic cycles and credit demand. Their performance often fluctuates based on the health of the broader economy and interest rate environments.
- Policy Sensitivity: Since these are state-owned entities, government policies on lending, divestment, and capital infusion can play a significant role in price movements.
What Investors Should Track
When looking at these ETFs, tracking the expense ratio and the tracking error is essential. A lower expense ratio ensures more of the returns stay with the investor, while a low tracking error indicates that the fund is accurately mirroring its underlying index. Investors may also want to monitor the asset quality and credit growth updates of the underlying PSU banks, as these are the primary drivers of long-term value for the sector.